The Digital Health Opportunity: Medicare Readmissions Penalties

Barnes-Jewish Hospital, a leading 1,200 bed academic medical center in St. Louis, provided approximately $200 million in Medicare services in 2012. That year, the Center for Medicare & Medicaid Services (CMS) fined Barnes-Jewish $2 million for inadequate care. Coming as a wake-up call for hospitals, this action also created an opportunity for digital health companies.

Barnes-Jewish was penalized by a provision in the Affordable Care Act (ACA) requiring “CMS to reduce payments to IPPS hospitals with excess readmissions.” (IPPS hospitals are those within the Acute Care Hospital Inpatient Prospective Payment System.)

Signed into law on March 23rd, 2010, and popularly known as “Obamacare,” the ACA established the Hospital Readmissions Reduction Program within CMS. It was the first significant governmental action designed to redirect Medicare funding from a fee-for-service to a fee-for-outcome model.

Readmissions were defined as “an admission to a subsection(d) hospital within 30 days of a discharge from the same or another subsection(d) hospital.” (General, acute, and short-term hospitals are all considered subsection(d) hospitals by the ACA.)

Readmission penalties were introduced in a stepwise fashion. During the 2013 fiscal year, three clinical conditions were susceptible for penalty: acute myocardial infarction, heart failure, and pneumonia. Only hospitals that performed at least 25 cases of a selected condition were assessed to allow for an accurate calculation of the hospital’s “excess readmission ratio.”

The penalty, called a Readmissions Adjustment Factor, was set at 1% of the penalized hospital’s total Medicare billing for 2013. It was then increased to 2% in 2014 and 3% in 2015.

Although pressure grew slowly, the message was clear: patients with one of the selected conditions who were readmitted within 30 days for the same condition – or a related complication – would become increasingly costly.

2015 saw both a penalty increase and the addition of two conditions to the list: knee and hip arthroplasty, and chronic obstructive pulmonary disease (COPD).

In 2017, the pressure will further grow to include coronary artery bypass graft.

Medicare Readmissions Within 30 Days Are Common & Costly

According to an August 2015 report by the Heartland Institute, “although the national readmissions rates have dropped,” approximately one-fifth of Medicare patients are readmitted within one month of discharge.

However, the report went on to explain, the reasons for readmission are not always within the hospital’s control.

“There are so many functions and components as to why a patient may be readmitted. A lot of them are not in the control of hospitals, and yet hospitals are the ones being penalized.”

In 2014, readmission penalties applied to hospitals were estimated at $227 million. This increased to $428 million in 2015. Although significant sums, these fines only recovered a small portion of the actual cost of 30-day readmissions for Medicare. Potentially avoidable readmissions are estimated to cost the organization $17 billion each year.

“The majority of the 2,232 hospitals that escaped Medicare penalties were automatically exempt because they specialize in certain types of patients, were designated as critical access hospitals, or didn’t have enough cases for an accurate assessment.”

The Role of Digital Health

Hospital care is episodic care by nature. Patients discharged from the hospital are given verbal and written instructions regarding their post-discharge care. Many are prescribed medications. Some view educational videos, and a few are even scheduled into rehabilitation programs for their specific conditions.

But the care they receive rarely extends beyond this.

The burgeoning digital health industry aims to transform this episodic care, turning it into continuous care with the help of a variety of new technologies like wearable devices and smartphone applications.

For the large number of digital health companies that have appeared in the last few years, addressing the clinical challenges posed by frequent readmissions presents new opportunities to improve healthcare’s quality while reducing its cost.

And, due to the Hospital Readmissions Reduction Program, healthcare providers now have an added incentive to pilot digital health technologies aimed at reducing readmissions.

The Opportunity for Digital Health Companies

Digital health companies have an opportunity to improve patient-specific health behaviors in the post-operative period for each of the conditions included in the Hospital Readmissions Reduction Program. Some have already formed partnerships to sharpen their focus on these conditions.

Novartis recently partnered with Qualcomm Life on the remote management of COPD. Under the agreement reached between the two companies, Novartis will connect its Breezhaler inhaler to Qualcomm’s Life 2net platform to monitor the inhaler usage of patients with COPD.

Propeller Health, a digital health startup that helps patients with asthma and COPD, has begun collaborating with global healthcare company GSK to develop a digital sensor for GSK’s Ellipta inhaler, which will assist COPD sufferers in monitoring their conditions as well.

A Means of Determining Efficacy

As more digital health companies embrace this opportunity, success at the 30-day timeframe could become a milestone in determining the efficacy of their interventions.

Companies that reduce the 30-day readmission rate for these conditions might then attract further investment capital, allowing them to expand the focus of their treatments beyond the initial month following discharge.

Those digital health companies that succeed at creating such interventions would significantly reduce healthcare costs, while markedly impacting the quality of life of those affected by these serious conditions.

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